As you get older and begin planning your legacy, it’s natural to start thinking about how to pass things on—your home, investments, land, or that rental property you’ve had for decades. Most of us want to make things easier, not harder, for our children and heirs. But there’s a little-known tax rule that, when misunderstood, can create costly problems. It’s called the step-up in basis, and it could be the difference between leaving a lasting gift—or a surprise tax burden.
In this post, we’ll walk you through what the step-up in basis is, how it works, and why it matters in your estate and financial planning. We’ll also point out some common mistakes we see and how you can avoid them.
What Is “Basis” and Why Does It Matter?
Let’s start with the basics. Your cost basis is generally the price you paid for an asset. So, if you bought a piece of land for $50,000, that’s your cost basis. If it grows in value and you sell it for $250,000, you owe capital gains tax on the $200,000 difference (unless you qualify for certain exemptions).
Here’s where the step-up comes in: if you pass away while still owning the property, your heirs receive it at a new cost basis—the fair market value on the date of your death. So instead of inheriting your original $50,000 cost basis, they inherit it at $250,000. If they turn around and sell it soon after, there’s little or no capital gains tax owed.
This “step-up” can save your family a lot of money—especially when it comes to long-held assets that have grown in value over time.
A Real-World Example
Imagine you bought 1,000 shares of a stock decades ago at $10 per share. It’s now worth $100 per share—so your original $10,000 investment is worth $100,000.
If you gift that stock to your adult child while you’re still alive, they receive it with your original $10/share cost basis. If they sell it, they’ll owe capital gains tax on $90,000 of gain.
But if they inherit the stock after your death, the basis steps up to $100/share. If they sell it shortly afterward, there’s likely no capital gain—and no capital gains tax.
This is why understanding the step-up in basis is so critical.
Common Mistake: Gifting Assets Too Early
Many people assume the generous thing to do is to pass property to their children while they’re still living. After all, why not let them enjoy it now?
Unfortunately, gifting appreciated property during your lifetime can undo the step-up and trigger unnecessary taxes. The person you gift it to receives your original basis, not the stepped-up value.
We’ve seen cases where well-meaning parents gift real estate or stock, and their children end up owing tens of thousands of dollars in taxes—simply because the parents didn’t understand the tax implications.
What Assets Receive a Step-Up?
Here are some common examples of assets that may be eligible for a step-up in basis:
- Real estate (including your primary home and rental properties)
- Individual stocks and mutual funds held in taxable accounts
- Art, collectibles, and other valuable personal property
- Privately held business interests
- Land or farmland not held in retirement accounts
Note: The step-up applies only to non-retirement assets. That means IRAs, 401(k)s, and similar accounts do not receive a step-up in basis. Your heirs will owe income taxes on distributions from those accounts based on how much is withdrawn and their tax bracket.
What About Married Couples?
If you’re married, this can get a little more complex. In community property states (like California, Texas, or Arizona), both halves of a jointly owned asset may receive a full step-up when one spouse dies. This is very favorable.
But in common law states (like North Carolina or Florida), typically only the deceased spouse’s half of the asset receives a step-up. The surviving spouse’s half keeps its original cost basis—so there may still be tax implications when the second spouse dies or sells the asset.
This is why it’s important to work with a professional who understands how your state’s property laws interact with tax law.
When You Might Not Want to Use the Step-Up
While the step-up in basis is generally a good thing, there are a few scenarios where selling or gifting earlier might make sense—especially if your income is low enough to qualify for the 0% long-term capital gains tax rate. But this requires careful timing and planning.
In most cases, though, holding the asset until death provides the best tax outcome for your heirs.
Planning Ahead
Here are some smart steps you can take today:
- Make a list of your appreciated assets. Note when you bought them, how much you paid, and what they’re worth now.
- Avoid making gifts without checking the tax consequences. A simple phone call to your financial advisor or tax professional can save thousands.
- Review your estate plan. Make sure your assets are titled correctly and your heirs are set up to benefit from the step-up.
- Work with professionals. This includes your financial advisor, estate planning attorney, and tax preparer. Coordination matters.
Final Thoughts
The step-up in basis is one of the most powerful tools available to help families transfer wealth tax efficiently. But it’s often misunderstood—or missed entirely—in estate planning.
At Cardinal Advisors, we believe good planning shouldn’t just save money—it should bring peace of mind. That’s why we’re here to educate and walk with you through decisions like these.
Watch our full video on this topic: https://youtu.be/B8JZcX9GQ1g
Download our free planning guide and show notes at https://cardinalguide.com/wp-content/uploads/2025/05/Step-Up-in-Basis-Handout-Estate-Planning-Show-Notes-1.pdf
If you’re not sure how this rule applies to your situation, let’s talk. We’d be honored to help you plan your legacy with confidence.
